nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒01‒03
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax evasion and Prospect Theory in a OLG economy By Francesco Busato; Francesco Giuli; Enrico Marchetti
  2. Taking the High Road? Compliance with Commuter Tax Allowances and the Role of Evasion Spillovers By Jörg Paetzold; Hannes Winner
  3. Payment Evasion By Buehler, Stefan; Halbheer, Daniel; Lechner, Michael
  4. Misreporting in the Value-Added Tax and the Optimal Enforcement By Hoseini, M.
  5. Tax compliance costs: A review of cost burdens and cost structures By Eichfelder, Sebastian; Vaillancourt, François
  6. Homeownership, Informality and the Transmission of Monetary Policy By Uras, R.B.; Elgin, C.
  7. Employment protection in dual labor markets: Any amplification of macroeconomic shocks? By Lochner, Benjamin
  9. Saving for a (not so) Rainy Day: A Randomized Evaluation of Savings Groups in Mali By Beaman, Lori; Karlan, Dean S.; Thuysbaert, Bram
  10. Knowledge Economy and Financial Sector Competition in African Countries By Simplice Anutechia Asongu
  11. May the Soul of the IFS Financial System Definition RIP in Developing Countries By Asongu Simplice
  12. Asignación de derechos de usufructo en mercados informales: Evidencia desde las calles. By José María Cabrera; Alejandro Cid

  1. By: Francesco Busato; Francesco Giuli; Enrico Marchetti
    Abstract: This paper presents a simple Overlapping Generation Model (OLG), aug-mented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). Themodel tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we ¯nd that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models.
    Keywords: Tax evasion, OLG models, Prospect theory
    JEL: E21 D03 D81
    Date: 2014–11
  2. By: Jörg Paetzold; Hannes Winner
    Abstract: We provide first field evidence on evasion spillovers as an important determinant of the individual compliance decision. Exploiting discontinuities in a self-reported commuter tax allowance, we observe a substantial share of taxpayers misreporting their claims. Using exogenous variation in job changes we find that individual evasion decisions are in uenced by the compliance behavior of other co-workers, with job changers from low- to high-cheating companies starting to evade much more after they move. In contrast, movers from high- to low-cheating companies do not alter their reporting. The most likely explanation is information transmission, including increased knowledge about the possibilities for non-compliance.
    Keywords: Tax Evasion, Self-Reporting, Spillover Effects, Information Frictions
    JEL: H24 H26 D83
    Date: 2014–09
  3. By: Buehler, Stefan; Halbheer, Daniel; Lechner, Michael
    Abstract: This paper models payment evasion as a source of profit by letting the firm choose the price charged to paying consumers and the fine collected from detected payment evaders. The consumers choose whether to purchase, evade payment, or refrain from consumption. We show that payment evasion allows the firm to charge a higher price to paying consumers and to generate a higher profit. We also show that higher fines do not necessarily reduce payment evasion. Finally, we provide empirical evidence which is consistent with our theoretical analysis, using comprehensive micro data on fare dodging on the Zurich Transport Network.
    Keywords: Payment Evasion, Pricing, Fine, Self-Selection
    Date: 2014–11
  4. By: Hoseini, M. (Tilburg University, Center For Economic Research)
    Abstract: A common fraud by registered traders in the value-added tax system is under-reporting sales and over-reporting purchases. This paper models this problem by linking the level of misreporting to the risk-aversion of taxpayers and the level of transactions with final consumers. In addition, it analyses the enforcement consequences of the new developments in information reporting and electronic invoicing, which enable the tax authority to randomly cross-check the invoices. The results highlight the importance of taxpayer’s subjective beliefs in shaping audit policy of the tax authority. The optimal audit rate for risk-neutral firms is an increasing function of transaction with final consumers, but this relationship may turn to be negative for risk-averse taxpayers. Moreover, the optimal level of invoice cross-checking on transactions of each commodity is positively associated with the number of trading firms.
    Keywords: value-added tax; tax evasion; information reporting; predictive analytics
    JEL: H26
    Date: 2014
  5. By: Eichfelder, Sebastian; Vaillancourt, François
    Abstract: Our paper provides a comprehensive report of empirical research on tax compliance costs. Compared to previous reviews, our focus is on average costs for sub-groups (individual taxpayers, small businesses, large businesses) and the composition of the cost burden with regards to different cost components (in-house time effort, external adviser costs, other monetary expenses), different taxes (e.g. income tax, value added tax) and different activities like tax accounting and tax planning. In addition, we give a short review of the most important compliance cost drivers and discuss the underlying causes of tax complexity and compliance costs.
    Keywords: tax compliance costs,cost structures,cost burdens,cost drivers
    JEL: H21 H24 H25
    Date: 2014
  6. By: Uras, R.B. (Tilburg University, Center For Economic Research); Elgin, C.
    Abstract: Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.
    Keywords: Cash-In-Advance,; Informality; Cross-Country Data;; Monetary Transmission.
    JEL: E26 E41 E44
    Date: 2014
  7. By: Lochner, Benjamin
    Abstract: Although labor market duality is a widespread phenomenon in many OECD countries, there is yet no research consent on the effects of duality on labor market dynamics and performance. Against this background, using a New Keynesian model with unemployment, this paper theoretically investigates the importance of labor market duality on labor market volatilities. The new insight is that duality leads to a non-linear reaction of unemployment volatility for both supply and demand shocks. A subsequent empirical panel data analysis confirms the model predictions. Uncovering the non-linearity in unemployment volatility helps reconciling previous divergent research results.
    Keywords: Dual Labor Market,Employment Protection,Firing Costs,Unemployment
    JEL: E24 E32 E52 J23 J41 J63
    Date: 2014
  8. By: Antonio Cabrales; Juan J. Dolado; Ricardo Mora
    Abstract: Using the Spanish micro data from the Programme for the International Assessment of Adult Competencies (PIAAC), we first document how the excessive gap in employment protection between indefinite and temporary workers leads to large differentials in on-the-job training (OTJ) against the latter. Next, we find that that the lower specific training received by temporary workers is correlated with lower literacy and numeracy scores achieved in the PIAAC study. Finally, we provide further PIAAC cross-country evidence showing that OJT gaps are quite lower in those European labour markets where dualism is less entrenched than in those where it is more extended.
    Date: 2014–11
  9. By: Beaman, Lori; Karlan, Dean S.; Thuysbaert, Bram
    Abstract: High transaction and contracting costs are often thought to create credit and savings market failures in developing countries. The microfinance movement grew largely out of business process innovations and subsidies that reduced these costs. We examine an alternative approach, one that infuses no external capital and introduces no change to formal contracts: an improved “technology” for managing informal, collaborative village-based savings groups. Such groups allow, in theory, for more efficient and lower-cost loans and informal savings, and in practice have been scaled up by international non-profit organizations to millions of members. Individuals save together and then lend the accumulated funds back out to themselves. In a randomized evaluation in Mali, we find improvements in food security, consumption smoothing, and buffer stock savings. Although we do find suggestive evidence of higher agricultural output, we do not find overall higher income or expenditure. We also do not find downstream impacts on health, education, social capital, and female decision-making power. Could this have happened before, without any external intervention? Yes. That is what makes the result striking, that indeed there were no resources provided nor legal institutional changes, yet the NGO-guided, improved informal processes led to important changes for households.
    Keywords: micro-savings; savings groups impact
    JEL: D12 D91 O12
    Date: 2014–10
  10. By: Simplice Anutechia Asongu (Association of African Young Economists)
    Abstract: The goal of this paper is to assess how knowledge economy (KE) plays out in financial sector competition. It suggests a practicable way to disentangle the effects of different components of KE on various financial sectors. The variables identified under the World Bank’s four knowledge economy index (KEI) are employed. An endogeneity robust panel instrumental variable fixed-effects estimation strategy is employed on data from 53 African countries for the period 1996-2010. The following findings are established. First, education and innovation in terms of scientific and technical publications broadly bear an inverse nexus with financial development. Second, the incidence of information and communication technologies is positive on all financial sectors but increases the non-formal sectors to the detriment of the formal sector. Third, economic incentives have positive implications for all sectors though the formal financial sector benefits most. Fourth, institutional regime is positive (negative) for the semi-formal (informal) financial sector. The findings contribute at the same time to the macroeconomic literature on measuring financial development and respond to the growing fields of informal sector importance, microfinance and mobile banking by means of KE promotion. Policy implications and future research directions are discussed.
    Keywords: Financial development, Knowledge Economy, Africa
    JEL: G21 O10 O34 P00 P48
    Date: 2014–09
  11. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: In this paper, we dissect with great acuteness contemporary insufficiencies of the IFS (2008) definition of the financial system and conclude from sound theoretical underpinnings and empirical justifications that the foundation, on which it is based, while solid for developed countries, holds less ground in developing countries. Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin (and skewed) burgeoning phenomena of mobile banking, knowledge economy (KE), inequality…etc. We conclude that the informal financial sector, a previously missing component in the IFS conception and definition of the financial system can only be marginalized at the cost of misunderstanding recent burgeoning trends in mobile phone penetration, KE and poverty. Hence, the IFS definition has incontrovertibly fought its final dead battle and lost in the face of soaring trends highlighted above. Despite the plethora of econometric and policy-making sins the definition has committed in developing countries through bias estimates and misleading inferences, may its soul RIP.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Poverty
    JEL: E00 G20 I30 O17 O33
    Date: 2014–01
  12. By: José María Cabrera; Alejandro Cid
    Abstract: En el presente estudio, observamos los resultados de una política de asignación masiva de derechos de usufructo a los cuidacoches, personas que desempeñan –en la informalidad– tareas de vigilancia de vehículos aparcados en las calles. Sorprendentemente, a pesar del costo reducido y los considerables beneficios de adquirir legalmente el derecho de usufructo sobre la cuadra, la mitad de los potenciales beneficiarios han rechazado la suscripción a ese programa. Con el fin de entender este mercado y la movilidad entre el sector formal e informal, construimos una base de datos inédita que contiene información económica y sociodemográfica de los cuidacoches. Dentro de los resultados encontrados, se destacan cuatro observaciones: la heterogeneidad en las razones de entrada al sector informal de cuidacoches; la protección del derecho de usufructo sobre la cuadra como el beneficio principal percibido de pasarse al sector formal; la aspiración a cambiar de trabajo de la inmensa mayoría; la capacidad de ahorro reducida. El estudio concluye con líneas para la elaboración de una estrategia de identificación causal que permita medir el posible impacto de la forma-3 lización como cuidacoches (i.e., obtener el permiso de la autoridad departamental) en la movilidad ascendente en el mercado laboral.
    Keywords: Derechos de usufructo; Trabajo informal; Movilidad social; Vulnerabilidad social; Aspiraciones
    JEL: I3 J4 O12 P14
    Date: 2014

This nep-iue issue is ©2015 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.